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Federal Reserve’s Secret Bailout Helped Banks Profit During Crisis

This article was written by Flexo in Economy, Featured. 10 comments.

While the Federal Reserve was publicly providing money to member banks at interest rates of up to 0.5% during the financial meltdown of 2008, a different, less public program bailed out Credit Suisse, Goldman Sachs, and Royal Bank of Scotland with short-term loans with an interest rate of only 0.01%. Those banks received the bulk of the help from this program, but Morgan Stanley, Citigroup, Bank of America, and BNP Paribas in France also received billions of dollars. If consumers like you and me wanted to borrow money for 28 days, we might have to turn to payday lenders or shady techniques, where the price of borrowing expressed in APR could be 500%, 1,000%, or even more. These banks borrowed at least $30 billion practically for free, and had the opportunity to use that cash as leverage to increase earnings during the economy’s toughest market in the recent recession.

The details of this “single-tranche open-market operation” (ST OMO) do not include exact amounts, and members of Congress did not even know the details of this program until now, despite oversight responsibilities. These transactions were kept mostly secret because releasing information about this type of bailout at the time could have had a disastrous effect on the reputations of these institutions, doing more harm than good in a time of crisis.

The Federal Reserve adopted a technique usually used for controlling the money supply and affecting interest rates, and turned it into a facility for extending loans to the banks without the loans being a part of the Troubled Asset Relief Program (TARP) or bailout. Bloomberg explains how this special type of lending worked.

Under ST OMO, cash changed hands through repos, or repurchase agreements, which the central bank has used to move money in and out of the banking system for at least 60 years. In a repo, the dealer sells securities to the Fed and agrees to buy them back for a higher price after a set period of time…

When the central bank increases the money supply — by paying cash for securities in repos — interest rates tend to fall. When it drains cash from the system by selling securities in reverse repos, rates can climb. Using repos to provide emergency cash, a step the Fed announced on March 7, 2008, was a departure from that process…

It’s possible this plan helped save these banks from collapse, but was it necessary? And given the secretive nature of the program, would have there been any damage if the details were made public at the time, as was done for other aspects of the Wall Street bailout? What did these banks do with a practically free loan?

Photo: sachab
Bloomberg

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One-Third of Home Loans are Under Water

This article was written by Flexo in Real Estate and Home. 12 comments.

A few years ago, a coworker formed an investment partnership in speculative real estate. He promised investors a 10 percent annual return and was using the capital to invest in Florida real estate, earning 15 to 20 percent overall. As most of the real estate had not even been inhabited or built yet, the investments were pure speculation. I haven’t been in contact with this individual, but I am wondering how this business is doing in this real estate market.

If you have a mortgage on a house you purchased recently, there is a good chance you now owe more on this loan than your house’s market value. These chances are even greater if you bought into the speculative markets in Arizona, Nevada, or Florida like my former coworker.

Owing more on your loan than the house is worth is not the worst financial situation, but it is risky. If you need to sell your house, you would still have to raise more money to pay off the remainder of the loan. If, on the other hand, you are lucky, you can remain in your house long enough to continue paying off the loan and to wait for home prices to return to the average rate of appreciation of about 3 or 4 percent. Eventually you could come out ahead.

If you find yourself in this position and you care not to be, you can make the time work harder for you rather than against you by increasing the payments towards your mortgage. A pure analysis of the numbers might say that it’s better to invest in the stock market rather than pay off your mortgage faster, but that doesn’t account for the risk of staying in a house whose loan is under water, and that risk can be measured differently by different families in different situations.

Robert Kiyosaki popularized the idea that a house is a liability. He is, of course, technically wrong. A house, and anything you own is an asset, while a mortgage, and anything you owe, is a liability, despite any marketing materials that try to redefine the words. But when your mortgage is higher than the market value of your house, you have negative equity, and that asset is not looking so helpful on your balance sheet.

This negative equity is mostly a result of speculative investing. The news that so many homes are under water invites criticism of home owners who bought a larger or more expensive house than they could afford and have now suffered the effect of a downturn in the real estate market or interest-only mortgages than have now adjusted to include principal payments. But that is only a small problem in this market, it is the speculative investing that accounts for the under water loans.

The areas that were identified as the largest contributors to the total number of home loans under water were the locations that saw some of the biggest increases in home prices as investors gobbled up as much property as possible. These investors intend on selling more frequently than a typical home owner, so they are more vulnerable to the market downturns that result in negative equity.

Are you under water with your home loan? Are you doing anything about it now or are you waiting for home prices to return?

Almost one-third of home loans under water, Emily Glazer, MarketWatch, August 13, 2009
Photo: respres

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Updated Latest Checking and Savings Account Interest Rates

This article was written by Flexo in Banking. 4 comments.

Following E*trade’s announcement that they were slightly increasing the interest rate on their Complete Savings Account to 3.15%, I’ve updated the list of savings and checking account interest yields. There have been a number of changes since the last update, including the following.

UFB Direct dropped from 3.35% to 3.01%.
Kirkpatrick Bank’s Savings Square dropped from 3.25% to 3.05%.
E-Loan increased from 2.75% to 3.01%, plus they are offering a short promotion for new money at 3.75%.
Presidential Bank decreased from 2.75% to 2.6%.
VirtualBank decreased its entire hierarchy of rates with the lowest level down to 1.77%.

Due to popular demand, I’ve added iGoBanking to the list. This bank’s savings account is offering 3.28% APY currently, placing them towards the top of the list, below only OneUnited and Washington Mutual.

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Another One Bites The Dust: HSBC Direct Lowers Interest Rate

This article was written by Flexo in Banking. Add a comment.

When I mentioned that ING Direct dropped its savings interest rate 20 basis points, from 4.5% to 4.3% following the Fed’s drop, there was no surprise. I felt that other banks would be soon to follow. HSBC Direct is next, dropping a steeper 55 basis points from 5.05% to 4.5%.

There are more options out there. FNBO Direct is offering its 6.0% APY promotional rate for only a few more days, and their current plan is to reduce that rate to 5.05% according to Bank Deals.

* E-Loan is offering 5.0%.
* Emigrant Direct is still offering 5.05%, but I expect that to change soon.
* Various brokerages offer tax-exempt money market funds that are not protected by FDIC and sometimes have fluctuating rates, but your money would be as safe there as in a savings account.

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